For a brief moment, the curse of “fiscal drag” – the most pernicious of stealth taxes – appeared to have been banished from British politics.
Under the Coalition Government, workers’ tax-free allowance steadily increased above inflation year after year, meaning a shrinking share of the population paid income tax to the Treasury. It was a Liberal Democrat policy, enthusiastically adopted by Conservatives as their own.
From 2010-11, the personal allowance rose from £6,475, reaching £10,600 by the end of the Coalition in 2015-16, and then £12,500 by 2019-20.
If it had increased in line with inflation, the threshold would have been closer to £7,800 – meaning workers paying tax on an additional £4,700 of their incomes.
The Conservatives’ policy marked a stark change from the Gordon Brown years in the Treasury and Number 10. Under the Labour leader – who continued “fiscal drag” from the 1970s – tax thresholds went up in line with inflation. Wages, however, rose at a faster pace, meaning more people qualified for a higher tax bracket each year.
It was considered a stealth tax, with a bigger share of the population paying by default – and the Treasury raking in easy money.
Initially conceived as a tax on high earners, in 1990-91, it was paid by 1.7m people, or 3.7pc of the population. By the eve of the financial crisis, that was up to almost 8pc. It took some time to recover, but hit a new high of 8.7pc in 2013-14. This year, it is expected to hit 11.2pc this year, meaning one worker in every nine pays the higher rate.
John O’Connell at the Taxpayers’ Alliance says “the higher rate of tax is supposed to be for the best paid workers in the country, but instead it’s fairly commonplace.”
Workers do not always spot the extra bill – they are still getting better off in cash terms, and usually in real terms too, even as an extra slice is taken by Whitehall.
It can be very lucrative for the public purse, says Douglas McWilliams at the Centre for Economics and Business Research, but is not necessarily good policy.
“It depends where your political preferences lie,” he says. “I am in favour of transparency, and I think if people’s tax burden is going up, the Government should say so.”